Update: Dividend Safety Metrics

We continue our updates for the detailed dividend stock pages, as of today, additional dividend safety data is available for the majority of the stocks in our database. The individual pages now include the following Dividend Safety Metrics overview. See for example 3M (MMM).

Dividend payout ratio

The dividend payout ratio and dividend growth, representing the number of consecutive years of dividend increase, will provide some insight on the stock’s dividend safety. Read also more on What is a good Payout Ratio?

Dividend score

The Dividend score is based on our Dividend Score (SDS) system, which is designed to help dividend investors, to identify strong companies with a sustainable dividend and avoid companies that could be riskier to invest in. The Dividend Score System takes into account several fundamental and price-performance metrics that affect a company’s ability to continue paying dividends and its overall return.

Some of the criteria analyze are:

Business model and growth perspective

Dividend history and dividend growth

Dividend Yield

Payout ratios

Cash flow

Debt ratio

Price/earnings and enterprise value/EBITDA ratios

Recession performance

Geometric annual performance and loss ratio

The SDS scores range from 0 to 100. Of course, there are no guarantees when it comes to investing, but if a dividend stock scores over 60, it is an indication that the quality and the sustainability of the dividend are probably okay.

Dividend coverage ratio (DCR)

The dividend coverage ratio is calculated by dividing the annual earnings per share (EPS) by its annual Dividend per share (DPS). So, what is a good dividend coverage ratio?

When the dividend coverage ratio is above one, the earnings generated by the company are enough to pay the shareholders their dividends. A DCR above two is considered health and a DCR below 1.5 may be a cause for concern. An important aspect to take into account when using the DCR is the fact that this ratio is not forward-looking. A historical solid DCR is not an indicator for future dividend risks.

Altman Z Score

Dividend stocks “safety” can also be measured based on above-average market capitalizations and liquidity, balance-sheet strength (per their Altman Z-score).

The Altman Z Score Formula in short:

Altman Z score of greater than 2.99 means that the entity being measured is safe from bankruptcy (“Safe-Zone”).

A score below 1.81 means that a business is at considerable risk of going into bankruptcy (“Bankruptcy-Zone or Distress-Zone”),

while scores in between should be considered a red flag for possible problems. (“Grey-Zone”).

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